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Rain, trade wars and swine fever

After a multi-year period in which global grain and oilseed stocks ballooned to record highs due to little disruption in output, the market is suddenly facing some adversity on the production side as well as ongoing disputes that are disrupting traditional patterns of trade.

An unprecedented wet spring in the Corn Belt of the United States has left nearly 7 million acres of corn unplanted, forcing farmers to decide whether to instead plant soybeans or some other crop or collect crop insurance. Meanwhile, the now yearlong U.S.-China trade war that has effectively halted U.S. soybean exports to China, as well as Britain’s impending exit from the European Union, known as Brexit, are adding uncertainty to once stable markets.

 
Speakers at this year’s International Grains Council Conference in London, England, addressed these issues at length as well as guaging the impact that the fast-spreading African swine fever (ASF), which is plaguing China’s pig population and threatening other regions, will have on the global grain and feed markets.

Robert Johansson, chief economist for the U.S. Department of Agriculture, told delegates at the conference, held June 11-12, the reduction in corn production in the United States would have a ripple effect on the rest of the world.

“It opens up an opportunity for southern hemisphere producers, for example,” he said. “We know Brazil is harvesting a record corn crop and looking to expand acres this coming year both in corn and soybeans and is seeing a premium for exports to China.”

He added that rising prices and tightening supplies could incentivize more wheat production in Ukraine and other parts of Eastern Europe.

“Ukraine, Russia and Kazakhstan are an increasing presence in the global grain markets, and they are poised for record production this year,” Johansson said.

From a U.S. perspective, Johansson said the strengthening dollar is weighing on its ability to export agricultural commodities. The global economy also is weighing on the global grain and oilseed sector.

“The International Monetary Fund’s most recent forecast calls for slower global economic growth,” Johansson said. “That will translate into lower demand for agricultural products.”

Grain market ‘wildcards’

Stefan Vogel, head of commodities for Rabobank, U.K., discussed three “wildcards” that will impact the global grain market in the coming months. The first was relations between the United States and China, the world’s two biggest economic superpowers.

He said the mercurial nature of the trade talks and U.S. President Donald Trump’s penchant for expressing his optimism or pessimism about the negotiations via twitter breeds uncertainty in the market.

“You’ve seen funny behavior the last 12 months in the soybean market,” Vogel said. “The market always tries to solve problems; you throw one at them, they solve it. But it’s getting much more difficult when you don’t have to think about the weather but rather what is in the next tweet. That is very hard to manage.”

Even if the trade war is resolved, there are indications that China will not go back to buying U.S. soybeans, at least not for a while. Thus, Vogel said, the market is adjusting to new trade flows in that commodity.

“With the traditional flow of soybeans, you usually had five to six months of U.S. soybeans moving into the world market and supplying Europe, Africa and Asia, while South America took on the exporter role during the other six months,” Vogel said. “It was nice and easy, and everyone knew what to do.

“With the situation now, Brazil has to supply most of the needs of China and the U.S. has to supply the rest of the world. But two questions remain: Will China find enough soybeans in the world outside the U.S.? And, is the U.S. finding enough demand for all of its soybeans?”

The other major issue in China, besides its trade war with the United States, is the outbreak of ASF, which is projected to eliminate 25% to 35% of its pig population. Vogel said the outbreak, which recently has spread to Vietnam and South Africa, will have a significant impact on soybean and feed demand.

“ASF is something that’s very hard for the market to understand,” Vogel said. “We have never received so many calls and questions from clients on one single topic as we have on this one.

“You take a country that has half of the world’s hogs and take 25% to 35% of them out. That’s equivalent to all the pork production in North America. It’s massive. So then the concern is the soybean market drops like a rock. Who’s going to buy all those global soybeans?”

The other two “wildcards” Vogel mentioned were: will Brazil raise its biodiesel production mandate and will protein demand in India continue to surge?

He said if Brazil raises its biodiesel mandate to 15% by 2023 as expected, it will reduce the amount of soybean oil the country exports.

“We usually have seen 1.5 million or 2 million tonnes of soybean meal being shipped out of Brazil each year,” he said. “Argentina is probably already looking at that and hoping they can meet some of that demand.”

Demand growth slows

While much of the focus during the conference was on grain supply issues, Jonathan Brooks, head of the Agro-food Trade and Markets Division of the Organization for Economic Cooperation and Development (OECD), France, provided an overview of the near- and long-term demand picture. It was not an optimistic forecast.

“The main story here is we expect growth in demand for agricultural commodities to slow significantly over the coming decade,” Brooks said. “This will be true for all products with the exception of dairy.”

Brooks said the main drivers of demand are population and per capita income. While the global population is projected to increase by its usual 1% annually in the next 10 years, per capita income, which has been soaring in recent years in many developing countries, is expected to flatten.

“Essentially across developed economies and emerging economies we see that per capita income is being exhausted, partly because the levels of consumption per capita have caught up in much of the world,” Brooks said. “And while this is happening, Africa, where there is consumer potential to increase consumption per capita, is not growing fast enough for that catch-up to occur.”

Leading the way in the burgeoning demand for grains and oilseeds over the past decade has been China. But Brooks said demand there has peaked and the OECD expects “slower growth in China and stagnant per capita demand for cereals, meat and fish.” He added that the OECD also forecasts a slowing of the growth rate for feed demand and stagnant demand for biofuels in the developed world over the next 10 years as production mandates level off.

Brooks expects grain and oilseed trade to become more important over the next decade as it “increasingly follows patterns of comparative advantage.”

To mark its 70th anniversary and 49th session, the International Grains Council (IGC) welcomed council delegates and conference participants to a reception at the Japanese embassy on June 11.

Koji Tsuruoka, Ambassador of Japan, welcomed all guests and congratulated IGC members on 70 years of international cooperation in grains trade and thanked the U.K. government for hosting the intergovernmental organization.

“The International Grains Conference is a fantastic opportunity to meet and exchange ideas with key players from across the global grains and oilseeds supply chain,” said Robert Goodwill, Minister of State, Department for Environment, Food and Rural Affairs, U.K. “The total value of crops output in the U.K. last year was estimated to be more than £9 million — a rise of 1.7% on the previous year. We must continue to capitalize on the opportunities for the sector, including boosting international trade and harnessing new technologies.”

Robert Johansson, chief economist, U.S. Department of Agriculture, said he was honored to help commemorate 70 years of international grains trade cooperation.

“Given the current uncertainty in grains and oilseeds markets and the many crop production and food security challenges we face going forward, we can be sure that the IGC’s role in facilitating trade for both producers and consumers will only increase in importance,” he said.

Arnaud Petit, executive director of the IGC, said in the last 70 years the IGC has extended its coverage to monitor trade in 16 commodities, including food staples. Currently IGC provides daily cost and freight prices for more than 200 routes, reflecting total costs of global trade in grains and oilseeds.

“All this information enhances transparency in international markets and supports policy decision-making processes,” he said. “Through the IGC grains conference, the organization has also developed a platform of regular dialogue between the public and private sectors.”


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